Big Ben At It Again

5/25/13

                  Welcome to this week’s edition of the Lewison Letter.  In my last writing, I advised selling some positions which have already produced big profits in anticipation for a “sell in May” hit on the market.  While I have been wrong so far, I still caution people to not be greedy as a market pullback is imminent.  Instead of looking for a move back down to 1525 on the S&P, I am looking for a pullback to 1597, which is only 3.1% from Friday’s close and just under 6% from Wednesday’s all-time highs.

                  This was the first really volatile week since the middle of April and for the first time all year long, the technicals AND fundamentals indicate markets are overbought and are ripe for pullback. First the technicals; On Wednesday morning, Fed Chairman, Ben Bernanke (who is truly the most influential factor in the markets) indicated the Fed could reign in the buying of bonds and mortgage-backed securities, but also warned that they are hesitant to do so to soon.  When Bernanke’s testimony was released Wednesday morning, markets shot up, hitting a new all-time high on the S&P of 1687.18, only to drop dramatically as Big Ben began taking questions, and then drop even further upon the release of the minute’s from the Fed’s last meeting.  That led the S&P dropping 39 points, to eventually close at 1655, putting in a huge shooting star formation (occurs during a bull market when the market opens and trades sharply higher, only to close lower than the open price) at all-time highs, which indicates a tired market.  While Thursday and Friday turned out to be strong rallies off a sharply lower open, they failed both times to break through Wednesday’s close, which means there’s strong resistance at 1655. If you look at the weekly candlestick formation of the S&P, this past week’s price action formed a spinning top, which during a prolonged bull market, indicates the rally is running out of steam.  In this formation, the market trades higher and lower than the weekly open, only to close slightly lower than where the week began.  Both technical signs must not be ignored and I predict will lead to a slight pullback, opening up a nice buying opportunity.

                  For a long time now, the market fundamentals have been broken, but as happens during a bull market, all bad news gets ignored.  Looking across the world, China PMI and GDP continues to show contraction, European GDP has been lower than expected, global unemployment continues to remain too high and the Japanese Nikkei suffered its worst one day drop (7.3%) in more than a decade, which since November, has been a good indication of where the S&P trades.  Additionally, the US dollar continues to remain near multi-year highs against most other currencies, making our goods more expensive, which will decrease exports.  But perhaps the most important factor is that we got a real look at what will happen when the Fed pulls back on the $85B in bonds and mortgage-backed securities it is purchasing each month.  Investors were spooked Wednesday when members of the Fed showed differences in their bond buying strategies for the future.  When word was out (eventhough this is nothing new) that the Fed might slow down their stimulus, everything under the sun fell: stocks, bonds, gold, oil, and currencies.  Fed Chairman, Ben Bernanke, continues to hold every financial market in his hands, and any sign of a slowdown in purchases will result in a dramatic drop in the stock market, as we saw on Wednesday.  What’s more concerning is that Bernanke didn’t say anything on Wednesday that wasn’t already known at the beginning of the year.  The fact that the market reacted that way on Wednesday indicates to me that the bulls are re-thinking this rally and are becoming more cautious. 

                  Another statistic that I am looking at is the amount of money invested in the market on margin (borrowed against your brokerage account).  Margin debt levels are at the highest they have ever been in history, $384.4B, up 1.3% MoM and 29% YOY.  When investors are most confident in the market, is when margin debt levels get too inflated because they no longer fear losing money.  That’s the precise time I want to be OUT of the market because that’s when investors start getting hurt and panic selling sets in.  The last time margin levels were this high was back in 2007 when the market also hit new all-time highs, only to drop into recession during the financial crisis, falling from 1576 to 667 over the next 18 months.  This is something that nobody seems to be paying attention to, but I am and think you should as well.  While I do NOT think the S&P will drop like that, its good to take note and be cautious of a pullback.

                  While I am short-term bearish, as mentioned earlier, looking for a pullback to 1600, before buying again, I do want to reiterate my bullish predication for the year.  I am increasing my prediction as I now see the S&P finishing the year at 1610 (15% gain), up from my previous estimate of 1575.  With so much relying on what the Fed is going to do, pay extra special attention of the Non-farm Payrolls number to be released at 7:30am CT on Friday, June 7.  Most likely the number will be much better than expected, although in reality the number isn’t good.  For the US to bring unemployment back to pre-recession levels, we need to create an average of 180,000 jobs/month for the next 5 years, and even then, our REAL unemployment rate would be just slightly below 10% (the unemployment rate that gets reported doesn’t include the under-employed or those who have stopped looking for jobs).  Be cautious going forward until the market gives you a chance to buy at a level you feel comfortable with. 

Full disclosure: I currently hold no open positions

Jeff Lewison

Sell In May

4/28/14

Welcome to this week’s edition of the Lewison Letter.  Not a whole lot has happened in the stock market since my last writing 2 weeks ago, as the S&P is down just 15 points, or about 1% since I last recommended taking profits.  The big moves have been going on in the commodities sector with gold, silver, copper, oil, gas, cotton, coffee and sugar, all (with the exception of oil and gas) trading down to 52 week lows.  I still remain bullish US Treasuries and while the VIX did spike about 50% a couple weeks ago, it has fallen back down, but that should be short-lived, so stay long the VIX.

                  Heading into May brings up the old adage of “sell in May and go away…buy in Oct it’s a lock.”  Going back 50 years, the Dow has gained an average of 0.3% between the months of May and October and gained about 7.5% between October and May.  Given how the stock market has yet to have any meaningful pullback this entire year, I look for the old adage to continue and would be a seller of the market against 1600 on the S&P.  The market is currently just a little more than 1% away from that level so that would be your risk.  If you have the ability to trade options, instead of selling your current stock holdings, you want to buy put options to protect yourself against a pullback.  While I realize that most of you don’t have the ability to trade options, you would have the ability to short stocks by simply selling the amount of shares you want to short.  To be outright short the market, sell the SPY, which is the S&P 500 Spider Shares ETF.  If you do not want to employ that strategy, I would recommend taking profits in stocks that have given you nice gains already this year (which is just about every stock other than Apple).   Please note, while I believe the overall market is going to head lower to 1525, as I stated 2 weeks ago, that doesn’t mean that every stock is going lower.  Here are a couple low risk buy opportunities no matter what direction the stock market heads: Buy AAPL against $400, buy AMZN against $240, buy TOL against $30, buy GS against $132, buy CAT against $78, and TLT against $118. 

                  The biggest story in the market over the last couple weeks has been the complete collapse of the gold market.  While it’s only down $120 since April 8, gold fell all the way down $270 to $1321.50/oz before rallying sharply over the last week to $1462.20/oz.  While many people feel the gold collapse is over and done, I’m in the camp that thinks the exact opposite.  There is no real reason to own gold as it’s NOT a safe haven and it’s NOT a form of currency.  Since hitting an all-time high of $1,923.70 a year and half ago, gold has been one of the worst trades out there, dropping 23%.  While I think gold may have a little juice left in this bounce, I think major resistance will come into play at $1,487.60 (61.8% Fibonacci retracement from the high to low over the last two weeks), and should be sold against that level.

                  One more trade that I really like right now is being long crude oil.  Looking at a daily 1-year chart of oil, it’s sitting right at an uptrend line and the 50% Fibonacci retracement over the last 52 weeks.  Since the beginning of April, crude oil has built a perfect inverted head-and-shoulders, almost too perfect.  The bottom of both the left and right shoulders are right at the 50% retracement of $91.86, with the bottom of the head forming a nice rounded base around $86.  From the 52 week low put in last June, draw a trendline connecting that level, $77.28, to the lows on Novemeber 9 and December 12, and it runs right into the lows on March 3.  If you extend that trendline all the way out, it comes right up to the 50% Fibonacci retracement and should act as current support.  If you want to buy oil outright, then buy the Crude oil ETF (USO) otherwise; the best way to play a rally in oil is through Phillips 66 (PSX) or Chevron (CVX). 

                  In closing, be aware of the “sell in May, and go away” because it’s bound to come true.  This market hasn’t taken any breather this year and is well overdue.  Over the last couple days, we have seen rallies in the stock market get tired and that will continue until a move back down to 1525 in the S&P.

                    

Full disclosure: I currently hold no open positions.                 

Jeff Lewison

Time For a Breather

4/13/13

                  Welcome back to the Lewison Letter. I know it has been a long time since my last writing, this is the first time in 2013, but I felt that now would be a good time to get back in the writing game. At the end of last year, I said that January 2^nd, one day after the Fiscal Cliff, would actually be the best buying opportunity of the year, which has turned out to be the case thus far. While I continue to remain long-term bullish, I have to advise taking some (not all) profits and let the market pullback before reloading. The market has already surpassed my year-end target for the S&P 500 of 1575 (this still remains my year-end price target), having closed on Friday at 1589, and looks a little extended at these levels. Please note that I am not advocating being short this market, but I am advocating being smart about your investments and taking profits in certain stocks that have rallied sharply already this year.  

                  The first reason I would look to take profits at these levels is because of how the US Treasuries are trading right now. If you pull up a chart of the most actively traded contract, the 10 Year Treasury Note (10Y), you’ll see how bullish it looks.  There are two old adages in play here, the first being, “don’t fight the Fed” and the second being, “the Treasuries never lie.” On March 15, the 10Y gapped higher and despite trying to fill that gap the next 5 trading days, never did, and instead have rallied two handles to 133’005, leaving interest rates at their lowest levels this year. While the stock market hits new all-time highs almost daily, the 10Y (which is the true and only safe haven) continues to climb, which means one of these market is wrong, and I believe it’s the stock market. With interest rates staying at all-time lows and the Fed practically forcing investors into the stock market to find any kind of meaningful return, there is only one reason for investors to own US Treasuries, and that’s to protect themselves from any drop in the stock market.  Volumes in the 10Y contract are much higher than this time last year, which means more and more people are protecting themselves, which I want you to do as well.  You can buy 10Y Treasuries through the TLT, which I have talked about in the past, and which is yielding a 2.50% dividend. 

                  Two weeks ago, the US Labor Department announced that this country created a spellbinding 88,000 jobs in March, the worst job creation in almost a year, and much lower than the 286,000 created in February. However, we must be the only country in the world that can report a 70% drop month-over-month in job creation and still lower the unemployment rate.  Please do not pay any attention to what the unemployment rate is because it doesn’t take into consideration the hundreds of the thousands of people who drop out of the workforce every month. The lack of job creation, the poor University of Michigan Consumer Sentiment number reported yesterday (sentiment was at a 9-month low), along with higher gas prices, higher taxes, and lower March retail sales numbers is too much negative macroeconomic news to continue this torrid rally in the stock market.

                  While the S&P hasn’t really shown any signs of tiring, the weekly chart indicates a 5^th wave up since the rally off the lows in October 2010 (the start of this current bull market). There is no way to tell when the 5^th wave will be complete, but a nice round number of 1600 would be a good estimate and a level to sell against. That gives you about another 11 points of upside compared to what I think will be a drop of 64 points to support of 1525 (78.6% Fibonacci retracement), which is not a favorable situation. I would rather see you take profits and wait for that pullback to 1525 before becoming a buyer again. Volumes in S&P futures have been relatively low this entire rally, much lower than last year (exact opposite of the Treasuries), which makes me not believe in this rally as much as if it were to be on high volume.

                  Another indicator that I’m looking at is the VIX, or S&P Volatility Index.  Back in 2007, the previous all-time highs for the Dow and S&P, the VIX hit an all-time low of 9.39 indicating consumer fear was at an all-time low.  The VIX will always move in reverse of the stock market, and while the markets took out those 2007 highs, the VIX has not, and still remains about 30% higher than where it was about 6 years ago. The fear gauge has been on a steady decline all year long and is overdue for a rally.

                  If you have missed this entire stock market rally in 2013, then stay out until we get a pullback to 1525, where you should then look to be a buyer.  If you have been in this market rally, please take some profits, as it would be the right thing to do. Some people say that there is no better place to buy than at all-time highs, but there is also never better place to SELL than at all-time highs. 

Full disclosure: I currently hold no open positions but have been buying the S&P on intraday pullbacks, and selling crude oil on intraday rallies.                 

Jeff Lewison